Zellner v. Citigroup Global Markets Holdings, Inc.

Background

Korey R. Zellner, an individual broker proceeding without a lawyer, sued Citigroup Global Market Holdings Inc. He asserted a New York state-law fraud claim and a claim under Section 11 of the Securities Act, 15 U.S.C. § 77k, which concerns false statements in a securities registration statement.

Citigroup issued UWT notes that tracked the S&P GSCI Crude Oil Index ER. Zellner alleged that on March 19, 2020, the notes stopped tracking the index and suffered what he described as a “massive 50 percentage point shortfall.” He alleged that the software used to track the index was automated and believed that the shortfall could only have resulted from human intervention. He also alleged that the UWT notes’ registration statement contained untrue statements because of the March 2020 shortfall.

Citigroup’s Jurisdiction Arguments

Citigroup moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which challenges a federal court’s subject-matter jurisdiction—the court’s legal authority to decide a dispute. Citigroup argued that diversity jurisdiction was unavailable because Zellner’s compensatory damages were below the required amount and that the Section 11 claim was asserted only to create federal-question jurisdiction.

For diversity jurisdiction, the amount in controversy generally must exceed $75,000. Zellner claimed $54,409.99 in compensatory damages and sought $489,681.81 in punitive damages. The court explained that punitive damages for ordinary fraud are available under New York law only when the alleged conduct is sufficiently aggravated, such as conduct showing moral indifference or criminal indifference to civil obligations. The court found that Zellner’s complaint did not allege facts supporting punitive damages. Therefore, the court held that Zellner could not rely on diversity jurisdiction under 28 U.S.C. § 1332(a).

Federal-Question Jurisdiction

Federal-question jurisdiction exists for civil actions arising under federal law. The court focused on whether Zellner had pleaded a colorable Section 11 claim. Section 11 standing is generally limited to people who purchased securities that were the direct subject of the specified prospectus or registration statement.

Citigroup argued that Zellner could not seriously assert a Section 11 claim because he had not alleged that his UWT notes were covered by the prospectus identified in the complaint. The court held that this argument addressed whether Zellner had a valid claim, not whether the federal court had power to hear the dispute. The court therefore did not treat the argument as a jurisdictional defect.

The court considered converting Citigroup’s Rule 12(b)(1) motion into a Rule 12(b)(6) motion, which challenges whether a complaint states a legally valid claim. It declined to do so because Zellner, who was representing himself, had not had an opportunity to respond properly to Citigroup’s Rule 12(b)(6) arguments.

Disposition

The court denied Citigroup’s motion to dismiss for lack of subject-matter jurisdiction. It directed the Clerk of Court to terminate ECF No. 19. The opinion did not decide whether Zellner ultimately could prove his fraud or Section 11 claims.